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Type four win-win trading

by Robert Waldmann

Brad DeLong clears his throat. I throw a cow.

He wrote:

The win-win benefits of trading money for money–where are they? It turns out that they are there. There are, actually, four:

1. Trading money now for money later: people who want to save now and spend later can make win-win trades with people who want to spend now and save later.
2. Risk: people who are unusually averse to risk in general can make win-win trades by trading off some of the risks that they are bearing to people who are unusually tolerant of risk in general.
3. Insurance: people who are holding a lot of one big risk can reduce the risk of catastrophic loss by paying a great many others to each take a small piece of that risk.
4. Information: people who have information that prices are going to rise can make win-win deals with people who have information that prices are going to fall–although here the win-win is not for the participants in the trade: for them it is zero-sum, and the winners are those others who observe the market price at which the trades occur.

I comment.

Ahem. Your fourth win-win “Information:” is not like the others. You redefined win-win to mean “socially desirable” and decide that, if a third party wins, it is a win-win. Also, as you understood when you were in high school and Grossman and Hart figured out when you were in college, information does not explain trading. If the only differences across people were that they had different information then trades couldn’t be win-wins. If it were common knowledge that everyone is rational then trades couldn’t occur. It is not unusual for someone in a type 4 trade to think they are in some other sort of trade. In *theory* there are no type 4 trades which are known to be type 4 trades. Obviously in reality there are such trades.

Now, obviously, trading volumes can not be explained by trades of types 1 through 3. Similarly the amount of CDSs written can’t be explained that way, since it is vastly greater than the amount of assets on which CDSs were written.. I think actually that this is a highly relevant problem. I’m not sure that you can explain the existence synthetic CDOs without type 4 trading which is known to be type 4 trading.

Obviously not everyone is rational (who ever thought everyone was). In particular, there is a group which keeps writing papers which correspond to actual financial markets and keeps being ignored. I forget who they are, but they have created a subfield of Lake Wobegone finance in which everyone thinks they are relatively more informed than they are. Obviously this is what’s normally happening — traders think their trades are profitable, because they think the traders on the other side are irrational.

Goldman Sachs claim that people always know there is a short seller in “such trades” refers to synthetic CDOs not all CDOs. One case of someone with exposure to mortgage default risk who wants to shed it is that someone owns an RMBS and wants to insure it. That agent could just buy Treasuries and sell the RMBS to form a normal non synthetic CDO. I can imagine other people trying to shed a correlated risk — construction firms and construction workers should have bought RMBS-CDSs to hedge against the bubble bursting — but do you really think that ACA and the German bank thought their counterparties wore hard hats to work ? No they thought that their counterparties were irrational type 4 traders.

It is obvious that the synthetic CDO market was type 4 Wobegone finance. The Case-Shiller assets are better for hedging of all risk except specifically for RMBS default risk which can be completely hedged with only non-synthetic CDOs. Basically ACA had to know that their counterparties were someone like Paulson.

Now there was fraud all right. ACA didn’t know that their counterparty was uhm helping them choose underlying assets for the synthetic CDO. However, if they thought they were selling insurance, then they were dangerous fools such that taking their money is a public service.

In fact, I think the fraud was a public service. If people who think they are smarter than average decide that maybe Goldman-Sachs is defrauding them, then there will be less speculation. I think that would be a very good thing. The reason is that I think type 4 trading reduces the valuable information in prices. The trades can’t exist in Nash equilibrium. Therefore finance theorists assume that there are some irrational traders. Then finance theorists (except for DeLong et al) assume that the volume of irrational trade is exogenous. They conclude that anything which causes high trading volume causes prices to be closer to fundamental values. That’s a pretty direct passage from an unjustified assumption to a conclusion. I think it is obvious that higher trading volume causes greater price volatility and that this volatility is always vastly greater than the volatility of fundamental values. So I think that, aside from not being an argument that type 4 trades are win-wins, your argument has it backwards. I think that real world type 4 trading reduces the information content of prices — because it is fundamentally irrational. So less of it would be better.

Goldman Sachs has damaged its reputation as a fair broker with this scam. I think that is an excellent thing, because that reputation caused people to trade if they thought they were smarter than average. Fear of being cheated by Goldman Sachs makes up for irrational over confidence and will lead the economy towards where it would be if everyone were rational. To put it briefly, what’s bad for Goldman Sachs is good for the world.

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Greece – GIIPS – Eurozone – Big Problem

O.K., Greece is now “high yield”, “junk”, “below investment grade”, at least according to S&P. What I mean by that is S&P now rates Greece’s foreign and local currency sovereign debt at the BB+ level (with a negative outlook), below the sometimes-coveted investment grade status, BBB- is the minimum. Why did S&P feel the need to do this now? Just covering its _ss – Greek debt was rated A- as recently as December 2009.

On to the Germans. What they are doing is actually quite striking: offering a bailout in order to appease markets so that international investors will pick up the Greek bill (never was going to happen anyway); and then telling markets that bond investors in Europe will take a haircut so that international investors won’t pick up the Greek bill. I guess the light-bulb finally went on that there is a contagion brewing here because bunds are tight, while all Peripheries are wide.

The original bailout will likely be offered to satisfy Greece’s near-term obligations. However, in the meantime the probability that the liquidity crisis spreads across the GIIPS (Greece, Italy, Ireland, Portugal, and Spain) – especially Portugal with a 2009 current account deficit equal to 10.3% of GDP, making it shockingly susceptible to capital outflows – is rising.

We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:

First, there is a liquidity crisis in Greece (already underway).

Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash.

What Germany wants out of Greece (and any bailout thereafter) is the equivalent of an economic anaconda. It will force Greece to meet the limits of the EMU Stability and Growth Pact (3% of GDP) by some period, let’s say 2012.

Of course that cannot happen without an epic surge in exports. Here’s the death spiral: sharp austerity measures translate into unemployment, economic contraction, deflation, and yes, higher deficits. There’s just no way out of it.

So what is the be all and end all policy script? Regain competitiveness in world markets, no less. The Economist on Portugal:

Low growth reflects a disastrous loss of competitiveness since the country joined the euro. Portugal has lost export-market share to emerging economies (including those of eastern Europe) that churn out similar low-value products. This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart).

The IMF’s consultation on Italy, as per its latest Article IV report:

Economic rigidities, along with Italy’s specialization in products with relatively low value added, have also been contributing to a steady erosion of competitiveness. Consequently, Italy has been losing its market share of world trade.

And my favorite part of the Italy Article IV:

In the past, other countries have overcome similar challenges from very difficult starting positions with comprehensive policy packages.

Note the very incriminating term, “comprehensive”. That usually includes expansionary monetary policy and the depreciation of a currency to drive export income, both of which elude any of the GIIPS countries.

The Economist portrays Portugal’s path away from depression-land via export income by lowering ridiculously high labor costs (i.e., productive labor as measured by the unit labor cost index) relative to those in Germany. As such, Portugal should be able to pick up exports while the government drops the deficit and constricts domestic demand. Notice the catchy title!

But what they fail to illustrate is the fact that all of the GIIPS are in EXACTLY THE SAME UNCOMPETITIVE BOAT!

So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany. Notice that Ireland is the only GIIPS with a fighting chance, according to the Eurostat’s forecast.

I’m married to a German – I understand stubbornness. But this time, being stubborn is just going to get the Germans in trouble.

The GIIPS are 34% of Eurozone GDP – try to export your way out of that one when 1/3 of the “Zone” is reducing costs and cutting wages. It’s a fallacy of composition to assume that the GIIPS are cutting spending while the aggregate remains intact. Furthermore, each EU country exports an average of 68.6% within Europe, so Germany’s clearly going to feel this, too – at least if the “Zone” gets past the immediate liquidity crisis.

Nobody talks about this – but Greece can secede from the Eurozone as per the Lisbon Treaty.

Rebecca Wilder

Update: It should be noted that Lisbon allows a country to leave the EU, of which the Eurozone is (effectively) a subset.

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What to do about CDO ratings II

Robert Waldmann

An earlier post on this topic seems to have been eaten by blogger (update it’s back). This post is roughly half roughly retyping.

I have two proposals (last time I only had one). One is to give up on the ratings agencies. They were geese that laid golden eggs providing an immensely valuable service for a tiny fee, but we’ve killed them. Regulations could be based on firms which put a whole lot of money where their mouth is. Those would be firms which write CDSs. Personally I trust the vampire squid. If G-S is willing to write CDSs with huge notional value on something and sell them for y basis points per year, I’d guess they are pretty safe. GS may or may not be evil but they sure aren’t stupid. This reform would have to wait until the idiot CDS writer problem is solved (can you say AIG-FP ?).

Short of that, I’d say it would work fine to require the agencies to insure 0.01% of anything they rated. It takes a long time for instruments to actually default, but if the agencies balance sheets included CDS written and marked to market, they would be much much more careful.

A problem with this proposal is that the incentives are too long term. Ah that’s another hard problem. The solution is to make compensation above say $500,000 a year of officers of, for example, ratings agencies be paid only in stock which can’t be sold for 10 years (they can live on the dividends until then).

* it’s baaaack

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The NY Times Jumps the Shark — Again

UPDATE: Tristero piles on the details that I assumed. And Bloix in comments there makes it clear that the diagram which has the Generals’s panties in twists is relatively straightforward compared to a car’s electrical system (as anyone who has used Erwin or Visio or even Powerpoint to build data flow diagrams can tell you).

Why does Elizabeth Bulmiller have a job? Because she writes nonsense quoting Important Sources:

The slide has since bounced around the Internet as an example of a military tool that has spun out of control. Like an insurgency, PowerPoint has crept into the daily lives of military commanders and reached the level of near obsession. The amount of time expended on PowerPoint, the Microsoft presentation program of computer-generated charts, graphs and bullet points, has made it a running joke in the Pentagon and in Iraq and Afghanistan.

“PowerPoint makes us stupid,” Gen. James N. Mattis of the Marine Corps, the Joint Forces commander, said this month at a military conference in North Carolina.

Now, some of my best friends live in North Carolina, so I won’t say Gen. Mattis got cause and effect backwards. But if you really believe that the article’s attached graphic is either a bad representation of the situation in Afghanistan or an impediment to understanding, then you shouldn’t be in a position to command hundreds, if not thousands, of military personnel.

In short, you probably thought it was a good idea to invade in the first place because everything would be perfect and you would be greeted with flowers, not putting them on 5,000+ American graves to date.

Because you didn’t understand that countries are both made up of living organisms and that they, in turn, act as if they are living organisms, with interactions that change depending on the conditions, facilities, and income flows (or, as the graphic says, “narcotics”).

If you don’t understand that, then you don’t understand nation-building, and have no excuse to claim that is what you are doing.

It’s a poor craftsman who blames his tools, and an even poorer reporter who takes those claims at face-value and presents them in “the paper of record.”

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Ross Douthat and the cocoon

Robert Waldmann

Douthat is worried about the Republican information cocoon. He thinks that conservatives should not rely so much on Fox News and should be open to media which they consider unfriendly (such as his employer the New York Times). He argues that Republicans achieved more back before Fox
In the age Before Fox News, on the other hand (B.F.N., to historians), the American Right managed to lower taxes, slow government’s growth to a crawl , whip inflation, and deregulate important swathes of the American economy, among other Reagan-era accomplishments.

After the jump, I click Douthat’s link and consult an obscure source called the Wikipedia.

Douthat shows how people who live in cocoons make fools of themselves. First click *his* link. You will find that the graph does not show a slowdown in the growth of government spending under Reagan. I assumed that he had defined government as not including the military and so had a misleading graph which supported his claim, but, in fact, he just showed a graph which shows slow growth of spending after the end of the cold war and during the Clinton Presidency including the 6 years of Republican control of congress. I think he is counting the Reagan years as starting at the trough of the Volker recession and he definitely doesn’t count Bush Sr as a pre-Fox Republican. He’s really definitely measuring trough to peak and timing presidencies by looking at recessions. And this is the conservative warning about living in a cacoon.

Oddly, I mean to post about another gross historical error in that brief quotation. It is the claim that under Reagan “important swathes of the American economy” were deregulated. I don’t know what Douthat has in mind. I certainly don’t recall any such important deregulation under Reagan (well there was deregulation of S&Ls and you know how that turned out). I think he is thinking of Airline Deregulation Act of 1978. I’m sure that all Republicans agree that Reagan deregulated the airlines and that Carter didn’t deregulate anything, but they are wrong. Note there was an even huger Democratic majority in the Senate in 1978 than there is now. Or maybe it was the deregulation of interstate trucking via the motor carrier act of 1980 . Or maybe it was the phased deregulation of oil prices which began on April 5 1979 . Sure seems like the deregulating conservative hero Ronald Reagan had a Southern accent and grew peanuts.

But Reagan must have deregulated. Everyone knows Reagan deregulated. What exactly ? I have used “refuted by 5 minutes of googling” as my standard for rejection of reality for years now. This time, I stuck to Wikipedia. Recall this is from a post arguing that Republicans ought to be reality based.

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Coal extraction issues will remain lost in the shuffle

by David Zetland
reposted from Aguanomics

(Rdan here…
I have not posted David’s material in awhile, nor actually much on economics of water in more than a year. We don’t always agree on the economics of water, but we do agree on its importance and value. My first postings on water economics were a result of a challenge from Tim Worstall to look at privatizing water utilities as occurred in 1989 in the United Kingdom, in relation to privitizing water supplies in the US and ongoing changes of ownership through the World Trade Oganization rules. Time permits a return to my special interest. Unfortunately it is still a ho-hum issue for the bulk of Americans if the media is any indication.
I am posting David’s post on coal and water tables so I don’t have to. But my sentiments are along the same lines.)

The sorrow of West Virginia

Some of you may have heard of the 25-plus coal miners who died in an “accident” at the Upper Big Branch (UBB) mine. What you may not have heard is this:

In 2009, the Mine Safety and Health Administration cited the UBB mine 515 times, often for problems with its ventilation and escape-route plans. Some 48 of the citations were for violations deemed likely to lead to serious injury or illness.

The Massey Energy Company, which owns the UBB mine, is contesting many of those violations. But this is not the first time that Massey—the fourth-largest coal company in America—has come under fire for its safety practices. In 2006 two people died in a fire at the Aracoma mine, which Massey owns and which was found to have inadequate water supplies and poor ventilation. Massey paid $4.2m in criminal and civil fines. In 2008 Massey paid $20m in fines levied by the Environmental Protection Agency for clean-water violations.

Don Blankenship, Massey’s boss… called safety violations “a normal part of the mining process”.
I’ve a few things to say about this:

1.Fuck you, Blankenship. (Yeah, sorry, but I gotta say it.)
2.Massey and Blankenship should be tried for corporate manslaughter.
3.West Virginia politicians are not serving their citizens; they are owned by resource extraction companies. After a change in administration, the EPA is finally slowing down mountaintop removal coal mining; see this post for more background.
4.Marilyn Hunt read my piece on human rights and wrote, asking about their right to be free on pollution from fracking”:*

My site is from rural Wetzel Co West Virginia. My husband Robert N Hunt is a research scientist so his friends at Bayer Pittsburgh have been doing free water tests finding Toluene, benzene, and other chemicals in wells and springs and now we are learning biocides are in the water too.

The air is also contaminated, workers have died here most not knowing what the chemicals were they handled or how to handle the pipes. Total SA is accused of crimes against humanity and is Chesapeake Energy’s new partner.

No one knew what these people were going to do and they said they used only salt water to “frac”. I kept them off my farm by hiring a good lawyer but many people signed leases and now they have no top soil and contaminated water.

Today I got an email that animal deaths are increasing in Pennsylvania and that ducks with multiple beaks are hatching out. We now have water testing from here up to Pittsburgh with our volunteer effort. Corruption of officials and state regulators has led us to the Region 3 EPA for enforcement but things are moving so slowly, we also are getting help from Sierra Club and Joe Lovett environmental activist who took on the coal cos. Halliburton got the frac drilling exempted from the Clean Water Act in 2005, opening the way for the concealment of chemicals and methods.

People are getting sick and many do not know what they are going to do.
What, indeed, can we do when companies pay to get the laws changed in their favor, pollute without fear of prosecution and lie to people who cannot discover the truth on their own. West Virginia has more in common with Angola or Nigeria than their neighbors in Virginia. Why do those neighbors have nice clean water, air and soil? Because they commute to Washington DC, where they enforce laws to ensure that their neighborhoods are safe and clean.

Bottom Line: Can we get a little justice here, please?

* Using water to hydrologically fracture hardrock, to extract natural gas. I’ve ignored fracking until now, but I — like others — wonder if the process of pressure injecting water and “proprietary” chemicals underground, and then draining the waste into local watersheds is really such a good idea. Fracking is certainly not harmless, those chemicals are probably not harmless, and those who extract are not taking responsibility for the environmental harm they are causing. This is just terrible.
Addendum: Manslaughter charges are justified (via JWT): “A comparison between Massey’s safety practices and those of other operators in the coal industry shows sharp differences”

21 April 2010

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A Look at Recessions Part 1: By the President’s Political Party

by cactus

A Look at Recessions Part 1: By the President’s Political Party

I am going to have a few posts on recessions over the next few weeks. This one is short – I’m trying to get another batch of copy edits out to my publisher. In this post, I’m focusing on the period from 1929 on – that’s the period for which real GDP per capita is available. Because I’m swamped, I’m going to put up some graphs and let them do their own talking.

The graph below shows the length of each recession in our time period, in months. It also assigns a recession to the party of the President who happened to be in the Oval Office at the time the recession started.

Now, perhaps a recession that starts shortly after a president takes office is not entirely that President’s fault. Nor can you unambiguously blame someone who has already left office, as the former President might well have taken steps that might have avoided the recession had he not been in office. So the next graph only assumes a recession to a party if that party was in office for three or more years by the start of the recession. Three years seems a bit much for me, but I don’t have the time to argue right now, so I’m picking a big enough figure that nobody should complain. (Gray bars mean a recession falls into the three year no man’s land.)

What about the severity of the recession? Well, before I put up those graphs, a couple comments…

1. the BEA has quarterly data from 1947 on, and annual prior to that

2. I didn’t do any smoothing – I don’t want anyone complaining about what method I chose to do it. Thus, I simply assign each month the closest reported real GDP per capita. Thus, for instance, I assign Jan, Feb, and March of 1981 the real GDP per capita of 1981 Q1. Its not perfect, but it is what is and I don’t have to defend when I start downturns and how I’m going to smooth things when the recessions don’t start or end at the start or end of a quarter or year.

(Rdan…charts corrected)

So here’s the annualized loss by recession, also by party. Note that a very short recession could have a bigger annualized loss than a recession which lasted longer but had a bigger overall drop in real GDP per capita. Thus, there may be a trade-off between recessions length and monthly loss. (A topic for another week.)

And here it is with the 3 year deadzone pulled out:

Have at it.

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Deficit Commission, CBO Scoring and the "Leninist Strategy" for Social Security Reform

by Bruce Webb

I have had occasion before to mention the “Leninist Strategy” for Social Security put forth in 1983 and followed by Social Security ‘reformers’ ever since. The strategy has three main pillars:

One: reassure current retirees that their benefits won’t be cut
Two: convince younger workers that left unreformed Social Security just won’t be there for them
Three: blame the Boomers

Well time has moved on since 1983 and increasingly pillars One and Three are coming into collision and this combined with CBO scoring methodology has put the Deficits Commission into a bind. One which I will outline below the fold.

A central tenet of the Cato endorsed “Leninist Strategy” for Social Security Reform outlined in Butler and Germanis (1983) was that benefits for those in or approaching retirement should not be affected (p.549). This was billed as a matter of equity but was equally a bow to political reality. This tenet was maintained in the establishment of Bush’s CSSS (Commission to Strengthen Social Security) in 2001 as the first of the six Guiding Principles and most recently is a feature of the Ryan Roadmap which promises to hold at least initial benefits for workers 55 and older harmless.

Unfortunately this consistent upholding of Pillar One of the “Leninist Strategy” is undermining Pillar Three because workers 55 to 64 ARE Boomers and it is pretty hard to hold them responsible for ‘Crisis’ and yet give them a free pass, the rhetorical underpinnings of the “Leninist Strategy” are simply aging themselves out of effectiveness.

Adding to this rhetorical challenge for the ‘reformers’ is a methodological one deriving from CBO scoring. Traditionally both CBO and OMB score proposals over a ten-year time period and only occasionally peak over that horizon. But if as the current Ryan Roadmap does Ryan Roadmap: Social Security and promise that it “Preserves the existing Social Security program for those 55 or older” you get a ten-year CBO deficit score of near-zero. And if you define “preserves” and “existing” as also covering the COLA adjustment you almost equally kill any score for the next ten-year period.

This problem was largely self-created, those pushing for this Commission relied on a deliberate confusion of the concepts of deficit, debt and unfunded liability to use relatively short term deficits to sell’ solutions that realistically only address long-term debt and ‘liability’. In fact the official name of the Commission is Bipartisan National Commission on Fiscal Responsibility and Reform and its mission statement does not explicitly reference ‘deficit’ at all. Yet a search on ‘Obama deficit commission’ pulls up 10X the hits of ‘Obama fiscal responsibility commission’ and most of the latter reference the former anyway. For better or worse the MSM has settled on ‘Deficit Commission’.

A couple of years ago hardly anyone outside the policy world knew or cared much about CBO scoring, but a year of Health Care Reform has accustomed people to use that score as a touchstone. Adhering to the “Leninist Strategy” and the Ryan Roadmap for Social Security will return a big fat Zero as a CBO score. On the flip side most of the ‘fixes’ floating around out there give Boomers a mostly free pass. Which leaves the ‘Deficit’ Commission a tough choice: get a good score by sticking it to Boomers right away, and so angering the single largest demographic cohort of Americas precisely when they are in the prime voting year? or take the zero and try to sell Gen-X and the Millenials that taking huge future benefit cuts that do nothing to address short term deficits is just the price they have to pay for past excesses?

In my view Entitlements Crisis people over-played their hand. First they sat by while their allies in the Republican Party rather cynically used the savings from Medicare reforms in the HCR bill to be framed as “medicare cuts”, and second allowed the framing of the Fiscal Responsibility Commission to fall within “Obama deficits” when realistically they will have no short term effect. Not at least without significant short term political fallout. Should be interesting.

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Thoughts on EM conference in NY

Yesterday I attended the 6th Annual Goldman Sachs Emerging Markets conference in New York. My takeaway from the conference overall was that the risk-on sentiment that is driving massive inflows into EM funds is still very much present. Going forward, the conference participants generally see emerging markets as “different” from those ten years ago, and will no doubt remain resilient to the sovereign stress that is emanating from the developed world.

China. Goldman Sachs views the recent property boom as limited to that sector – the Chinese authorities are currently clamping down via administrative tightening measures – and that a broader “asset bubble” is not present. China was deleveraging going into the crisis, so its starting point was on a very different level than that of other “frothy” economies, like the US or UK.

On the outlook for China, Goldman sees 13% growth this year, followed by a remarkable 12.4% next. The inflation outlook, although tame, depends very much on Asia continuing as front-runner of the policy tightening cycle.

Jan Hatzius presented his outlook on the US economy – he sees the Fed hiking rates in 2011, as monetary policy accommodates the massive labor underutilization. I could not disagree with this assessment.

Rebecca: I would add that I see a positive probability attached to further Fed QE measures, as the fiscal stimulus inevitably drags the economy – without further stimulus growth will turn negative and drag GDP. In lieu of a heroic surge in private sector demand, which is currently driven almost solely by the upswing on a massive inventory cycle, the Fed will have no choice but to continue to “pushing on a string”. The fiscal impetus is driving this recovery.

Actually I was truly shocked that the merits of the fiscal stimulus were not mentioned more directly in his outlook. He spent (roughly) 7 slides comparing this recession to previous post-war recessions, and not once did fiscal policy come up – just Fed policy. Several slides after that, we finally get a chart illustrating the contribution to GDP from government spending. And then, I knew it was coming, a chart about the US public debt to GDP. It’s just a scare tactic, I assure you; these charts should not be taken seriously. As long as the US issues debt in its own currency, and that currency is not fully convertible (into anything), the US government does not face solvency risk!

Unlike Greece….

Erik Nielsen proffered his outlook for the Eurozone. Currently, Goldman Sachs is more bullish on Eurozone growth than is the consensus. Their baseline case is that Greece’s liquidity crisis is mitigated through IMF/EU support, and that the solvency issues are repaired in a timely manner through restructuring and austerity measures. Overall, the economic impact remains mostly contained in Greece.

Of course, the risk in the interim is that the EU/IMF is too slow in approving the aid package, and a mass run on the banks ripples throughout the Eurozone (currently there is no deposit-insurance mechanism across the members of the “zone”). I queried Marshall Auerback regarding the banking sector in the Eurozone:

Rebecca: “In the “zone”, is there an FDIC-style insurance mechanism in place to shore up the banking system across the member countries?”

Marshall: “No. The deposit guarantee is handled on a national scale, which is why Ireland is basically insolvent. The deposit liabilities of its banking system are about 600% of GDP. Ireland can “write the cheque” to cover this, so it’s doomed. “

Rebecca: “Great, thx! This is not good…”

Marshall: “No, it’s a disaster. In many respects, Ireland’s problems are even worse than Greece. It truly is insolvent. Greece has problems because of self-imposed constraints, nothing more.”

Rebecca again: I still don’t see it: how “internal devaluation”, i.e., falling prices and massive wage cuts, is to drive export growth for all debtor across the Eurozone. It’s a fallacy of composition: if every country in the Eurozone deflated in order to improve competitiveness, then demand on the aggregate falls. Therefore, the Eurozone sees less rather than more export income generation.

The average country in the Eurozone earns over 60% of its export income via inter-European Union trade. Likewise, and this is why Nielsen’s base case is no contagion: the GIIPS countries (Greece, Italy, Ireland, Portugal, and Spain) account for 35% of GDP in Q4 2009. Contagion is assured if the GIIPS jointly face a liquidity crisis.

Ahmet Akarli is very positive on the outlook for Turkey. He is likewise bullish on Russia, which is consistent with the Goldman Sachs outlook for oil: $90/barrel in 2010 and $110/barrel in 2011. Finally, Hungary appears to be the apple of the investment banking eye. Hungary’s austerity measures have been very effective, and the economy gained momentum on improved competitiveness.

Rebecca: I should note that my feeling about Hungary’s bullish export outlook is consistent with that of the Eurozone overall: the forint is pegged to the Euro (within a band, that is), so its true competitive advantage can only be sustained by persistent productivity gains and wage declines.

Paulo Leme covered Latin America. For Brazil, their outlook on the BRL and its economy more generally is consistent with my own: hot! Week after week, the inflation numbers are “higher than expected”, the current account balance “surprises to the downside”, and domestic demand is outpacing GDP by leaps and bounds.

That’s all for now.

Rebecca Wilder

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